A deal to join Newcastle and Manchester building societies has taken a step closer thanks to heads of terms being agreed. The two societies first raised the prospect of a merger last summer and such a move could save Manchester, which has not undertaken any new mortgage lending since 2013.

The North West mutual, which is the smaller of the two with 11,000 members, was told by the Prudential Regulatory Authority (PRA) that it had insufficient capital on its balance sheet.

In dual statements to the London Stock Exchange, the societies said a merger – which could complete by July this year – would be in the interests of both its members providing greater resilience and additional capital strength. Without a deal, Manchester’s board has acknowledged uncertainty about the organisation’s future, in particular its ability to withstand a major financial or economic stress.

Manchester and Newcastle members will not get to vote on the proposed merger. Instead the mutuals” board will decide following action by the PRA.

Within the latest statements, the societies said the move would mean Manchester’s base could feed a “pipeline of talent” into Newcastle and its FinTech subsidiary Newcastle Strategic Solutions, which employs more than 700 people.

Chief executive of Newcastle Building Society, Andrew Haigh, said: “The merger presents an opportunity for both our societies to come together in a way that truly benefits both sets of members. As a financially robust, purpose-powered business, the move supports Newcastle Building Society in delivering our growth strategy at greater scale and impact, and in a way that offers opportunity for members and colleagues from both organisations.”

Chairman of Manchester Building Society, David Harding, said: “Manchester’s Board strongly believes that this merger is in our members” best interests. Our members will become part of a larger, financially robust society that can offer a range of products and services we are unable to match as a standalone entity whilst providing staff at Manchester with long-term opportunities within the Newcastle Building Society and group.”